The politics of S&P’s U.S. debt warning

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OK, so Standard & Poor’s has downgraded the outlook for the U.S. to negative, saying it believes there’s a risk policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

“Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,” S&P said in a release.

Obama’s much-hyped new budget plan is actually neither new nor a budget nor a plan. To the extent that it’s even a “framework” — to grant the White House its preferred descriptor — it’s one whose ideas and goals are precariously fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity. Then again, the core purpose isn’t budgetary balance but political persuasion.

And then there was the president’s rhetoric. Recall how Paul Ryan blasted Obama: ”Rather than building bridges, he is poisoning the well.” Here is how S&P puts it:

We view President Obama’s and Congressman Ryan’s proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.

2) The agency’s shocking note doesn’t mention the debt ceiling debate. But both Rs and Ds may try to use it to their advantage. Rs can argue it means the vote to raise the limit must include real budget reforms and cuts. Ds can say the U.S. fiscal position is precarious enough that this is no time to mess with the debt ceiling. Of course, that line would run counter to the Dem meme that the debt situation is important but not urgent.

3) Financial pros say that even should S&P take the next step and actually downgrade America’s AAA status — the note said there was at least a 1-in-3 chance of that happening within two years — it would likely have little economic impact. As the WSJ notes:

Meanwhile, Dan Greenhaus of Miller Tabak + Co. notes that even if the U.S. lost its premier status, that doesn’t mean the end of the world. “The experience of Canada and Japan show that the loss of a AAA rating is not a death blow,” he writes in a note to clients. “If governmental finances can be adjusted (in the case of Canada) or domestic participants continue to find the debt attractive (in the case of Japan), higher yields on a sustained basis are not assured.”

But that seems a bit too pat to me. Market and consumer psychology is a precarious thing. It might really depend on what else was happening in the world at that time.

4) I hope Republicans don’t let S&P use this warning to bully them into accepting tax increases to get a quick Grand Compromise budget deal. As I wrote a bit earlier today:

Here’s the problem: Any attempt to cut deficits and debt faster than Paul Ryan’s “Path to Prosperity“ would almost certainly have to involve immediate benefit cuts to Medicare and Social Security recipients or higher taxes. And to the extent that S&P’s call will be interpreted as an exhortation to cut now, those Democrats and Republicans (such as those in the U.S. Senate’s Gang of Six) who insist higher taxes must be part of the fiscal fix will have their hand strengthened. But what S&P is really saying is Washington must decide on a plan. Ryan has a plan, the Obama White House does not.

5) Washington types keep telling me that Americans really don’t care about the debt issue. But I think this warning — not to mention an actual loss of the AAA rating — is yet another data point that will sink into our collective head — right along with a trillion-dollar deficit, the EU debt crisis and our financial meltdown which shows too much debt can cause wealth to disappear in a flash.

[...] James Pethokoukis: Washington types keep telling me that Americans really don’t care about the debt issue. But I think this warning — not to mention an actual loss of the AAA rating — is yet another data point that will sink into our collective head — right along with a trillion-dollar deficit, the EU debt crisis and our financial meltdown which shows too much debt can cause wealth to disappear in a flash. [...]

[...] As James Pethokoukis noted, Obama’s muddled plan to solve the crisis was “fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity.” But more so, it was Barack Obama’s angry words and denunciation of Paul Ryan’s own plan that drove S&P to its conclusion. [...]

[...] As James Pethokoukis noted, Obama’s muddled plan to solve the crisis was “fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity.” But more so, it was Barack Obama’s angry words and denunciation of Paul Ryan’s own plan that drove SP to its conclusion. [...]

[...] As James Pethokoukis noted, Obama’s muddled plan to solve the crisis was “fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity.” But more so, it was Barack Obama’s angry words and denunciation of Paul Ryan’s own plan that drove S&P to its conclusion. [...]

[...] As James Pethokoukis noted, Obama’s muddled plan to solve the crisis was “fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity.” But more so, it was Barack Obama’s angry words and denunciation of Paul Ryan’s own plan that drove S&P to its conclusion. [...]

[...] As James Pethokoukis noted, Obama’s muddled plan to solve the crisis was “fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity.” But more so, it was Barack Obama’s angry words and denunciation of Paul Ryan’s own plan that drove S&P to its conclusion. [...]

[...] James Pethokoukis: Washington types keep telling me that Americans really don’t care about the debt issue. But I think this warning — not to mention an actual loss of the AAA rating — is yet another data point that will sink into our collective head — right along with a trillion-dollar deficit, the EU debt crisis and our financial meltdown which shows too much debt can cause wealth to disappear in a flash. [...]

[...] As James Pethokoukis noted, Obama’s muddled plan to solve the crisis was “fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity.” But more so, it was Barack Obama’s angry words and denunciation of Paul Ryan’s own plan that drove S&P to its conclusion. [...]

Author Profile

James Pethokoukis is the Money & Politics columnist for Reuters Breakingviews. Previously, he was the business editor and economics columnist for U.S. News & World Report. Pethokoukis has written for many publications including The New York Times, The Weekly Standard, Commentary, USA Today, and Investor's Business Daily. Pethokoukis is also an official CNBC contributor. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, The McLaughlin Group, CNN, and Nightly Business Report on PBS. A graduate of Northwestern University and the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! champion. james.pethokoukis@thomsonreuters.com